Why Every American Should Worry About Bank Record Subpoenas

Few can claim ignorance of the IRS push for full transparency of foreign bank accounts and income. Since the shot heard round the world that brought UBS to its knees, billions in taxes and penalties have been paid. Tens of thousands of U.S. taxpayers sheepishly stepped forward to declare overseas bank accounts. UBS avoided ruin and indictment, the smaller Wegelin private bank did not, and many other banks are not out of the woods.

The IRS and Department of Justice have had a remarkable string of victories, from John Doe summons proceedings to indictments of foreign nationals for U.S. tax crimes. But what may be the most insidious battle is hardly a blip on most radar screens. It is about FBARs, the once obscure reporting forms, required since 1970. Few knew about FBARs until recently, and enforcement was nearly nil.

Yet now four cases have upheld the IRS in an extraordinary action: serving a subpoena on a taxpayer suspected to have an undisclosed offshore account. The sole reason for the subpoena is to prosecute the recipient. The recipient can take the Fifth Amendment and refuse to testify as is our constitutional right, but can the recipient take the Fifth on the documents? You might think so.

Plainly, producing bank documents or FBARs would be incriminating. Yet four Courts of Appeal, the Fifth, Seventh, Ninth, and Eleventh, have held the Fifth Amendment provides no protection. Up until now the government has not been able to compel you to produce documents that incriminate yourself. This “act of production” privilege is part of the Fifth Amendment guarantee.

But some documents—the question is exactly which ones—are outside this documentary privilege. A 1948 case, Shapiro v. United States, says the government can require you to produce certain records. The case involved “essentially regulatory” records where the conduct was not “inherently criminal” and the records have “public aspects” rather than being purely personal.

You might think it would be obvious that your foreign bank records are purely personal, especially today. Apparently not. You might think it would be obvious that the government couldn’t make you incriminate yourself when the sole reason for the subpoena is to prosecute you for having an undisclosed foreign account. Apparently not.

Amazingly, these are pending criminal investigations where the target is forced to hand over incriminating documents of purely private bank records. Yet so far four Circuit Courts of Appeal have said they are fair game. The Fifth Amendment, it turns out, isn’t much help if you have a foreign bank account.

Lawyers have petitioned the U.S. Supreme Court for certiorari, but as with all cert petitions, it is a long shot. It may seem unimportant too. Who cares if a few people (who are almost certainly cheating on their taxes) are forced to produce bank records that will land them in jail? Yet it is worrisome that it is the same constitutional principle that protects us all from having to testify against ourselves.

The view that the Fifth Amendment should prevent compelled production of these records for this specific purpose seems, well, compelling. Even the Justice Department recognizes the sensitivity of this issue, stating that it isn't going to push its records retention theory beyond foreign bank accounts. "Trust us," they seem to say, which is unsettling. See Shamik Trivedi, No Intention to Expand Required Records Doctrine, Keneally Says, 2013 TNT 44-3 (3/6/13).

After all, the tax law is chock full of record retention rules. Many other areas of our increasingly complex lives are too. If they are all required records and all have somehow taken on public aspects, isn't every record now fair game? It would would seem to be a hard door to close.

Hopefully the U.S. Supreme Court will agree to hear both sides argue this important issue. If the Justices do not, Fifth Amendment protection may never be the same.

Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached atWood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

I handle tax matters across the U.S. and abroad (www.WoodLLP.com), addressing tax problems, tax disputes, writing tax opinions, tax advice on legal settlements, transactions, crypto, and many other matters. You can reach me at Wood@WoodLLP.com.